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Author
M. Anufriev
C.H. Hommes
R.H.S. Philipse
Year
2013
Title
Evolutionary selection of expectations in positive and negative feedback markets
Journal
Journal of Evolutionary Economics
Volume | Issue number
23 | 3
Pages (from-to)
663-688
Document type
Article
Faculty
Faculty of Economics and Business (FEB)
Institute
Amsterdam School of Economics Research Institute (ASE-RI)
Abstract
An economic environment is a feedback system, where the dynamics of aggregate variables depend on individual expectations and vice versa. The type of feedback mechanism is crucial for the aggregate outcome. Experiments with human subjects (Heemeijer et al., J Econ Dyn Control 33:1052-1072, 2009 ) have shown that price converges to the fundamental level in a negative feedback environment but fails to do so under positive feedback. We present an explanation of these experimental results by means of a model of evolutionary switching between heuristics. Active heuristics are chosen endogenously, on the basis of their past performance. Under negative feedback an adaptive heuristic dominates explaining fast price convergence, whereas under positive feedback a trend-following heuristic dominates resulting in persistent price deviations and oscillations.
URL
go to publisher's site
Language
English
Permalink
http://hdl.handle.net/11245/1.398197

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